City of Dubuque v. Iowa Trust, s. 93-895

• Decision Date: 22 June 1994
• Docket Number: 93-1709,Nos. 93-895,s. 93-895
• Citation: 519 N.W.2d 786
• Court: Iowa Supreme Court
• Parties: CITY OF DUBUQUE, Iowa, an Iowa Municipal Corporation; City of Boone, Iowa, an Iowa Municipal Corporation; Audubon County, an Iowa Municipal Corporation; Black Hawk County, an Iowa Municipal Corporation; Cerro Gordo County, an Iowa Municipal Corporation; Clinton County, an Iowa Municipal Corporation; Muscatine County, an Iowa Municipal Corporation; Scott County, an Iowa Municipal Corporation, on Behalf of Themselves and All Others Similarly Situated, Appellees, and David J. Lyons, Receiver, Appellant, v. IOWA TRUST, Elaine Gundacker, Mary Maloney, Robert Carr, and Richard Heidloff, Trustees of the Iowa Trust, Defendants, Davis, Hockenberg, Wine, Brown, Koehn & Shors, P.C., Appellant.

Page 786

519 N.W.2d 786

CITY OF DUBUQUE, Iowa, an Iowa Municipal Corporation; City of Boone, Iowa, an Iowa Municipal Corporation; Audubon County, an Iowa Municipal Corporation; Black Hawk County, an Iowa Municipal Corporation; Cerro Gordo County, an Iowa Municipal Corporation; Clinton County, an Iowa Municipal Corporation; Muscatine County, an Iowa Municipal Corporation; Scott County, an Iowa Municipal Corporation, on Behalf of Themselves and All Others Similarly Situated, Appellees, and David J. Lyons, Receiver, Appellant, v. IOWA TRUST, Elaine Gundacker, Mary Maloney, Robert Carr, and Richard Heidloff, Trustees of the Iowa Trust, Defendants Davis, Hockenberg, Wine, Brown, Koehn & Shors, P.C., Appellant.

Nos. 93-895, 93-1709.

Supreme Court of Iowa.

June 22, 1994.

James K. Horstman, Brigid E. Kennedy, and Lloyd E. Williams, Jr., of Williams & Montgomery, Ltd., Chicago, IL, and Diane M. Stahle and Thomas E. Salsbery of Davis, Hockenberg, Wine, Brown, Koehn & Shors, P.C., Des Moines, for appellant law firm.

Bonnie J. Campbell, Atty. Gen., and Gordon E. Allen, Deputy Atty. Gen., for appellant David J. Lyons.

Thomas D. Hanson and Barry A. Russell of Hanson, Bjork & Russell, Des Moines, for appellees City of Dubuque, et al.

Considered by HARRIS, P.J., and LARSON, NEUMAN, SNELL, and ANDREASEN, JJ.

NEUMAN, Justice.

This case is before us following two preliminary rulings issued in an action to recover damages stemming from the conversion of municipalities' funds invested in the Iowa Trust. The issues pertain to plaintiffs' cause of action against counsel for the trust, Davis, Hockenberg, Wine, Brown, Koehn & Shors, P.C. The law firm challenges the court's refusal to dismiss the action on standing grounds and its certification of the suit as a class action. Finding no error, we affirm and remand for further proceedings.

The Iowa Trust was established in 1990 to permit political subdivisions of the state to pool surplus treasury funds for investment. The treasurer of each municipality served as a member of a supervisory board which annually elected the trustees. The trustees were charged with investment and administrative powers outlined under the indenture of trust.

The Davis law firm was retained by the trustees as special counsel. In that capacity, one of the firm's attorneys drafted the necessary trust documents including the trust indenture. The indenture provided for an investment advisor, administrator, and custodian of securities, with provisions pertaining to the duties, powers, and liabilities of each position.

In November 1991, the trust investment advisor, Steven Wymer, made improper and illegal trades resulting in the disappearance of over $65 million in treasury securities held by the trust. Wymer also sold securities to the trust at an inflated price of $6.5 million over market. Consequently, the trust lost more than $71 million in assets virtually overnight.

While the Securities Exchange Commission pursued federal charges against Wymer and his California investment firm, the City of Dubuque--a trust participant--brought suit against the trustees, alleging mismanagement and breach of fiduciary duty. The City sought the removal of the trustees, an accounting of all trust funds, and the appointment of a new receiver to marshal and manage the assets until new trustees could be elected. The district court appointed David J. Lyons, then insurance commissioner for the State of Iowa, receiver. The court suspended the duties of the trustees and directed the receiver to "exercise all such powers and duties of the trustees as provided in the indenture of trust ... as well as any other powers and duties of a receiver appointed pursuant to Iowa Code chapter 680." Thereafter, the receiver pursued actions in Colorado and California in an effort to recover trust funds fraudulently diverted to entities in those states.

The City of Dubuque, along with several intervening plaintiff/participants, later sought leave to amend the petition to name the Davis firm as an additional defendant. The receiver resisted, claiming that by standing in the shoes of the trustees he held exclusive and plenary power to sue for damages caused to the trust by third parties. The court granted plaintiffs' motion over the receiver's objection and also joined the receiver as an indispensable party plaintiff.

The amended petition alleged thirteen claims of professional malpractice and breach of contract centering principally on the firm's simultaneous representation of the trust as well as Denman & Company/Institutional Trust Management, the trust administrator and custodian. These latter entities were corporations owned and controlled by Wymer. The petition alleged that the firm's conflicting loyalties to these clients resulted in substandard legal advice and the drafting of trust documents that failed to protect the trust participants from inadequate custodial arrangements and the unscrupulous conduct of the investment advisor. The amendment also sought to certify the cause as a class action so that all affected government entities could be represented in accordance with Iowa Rule of Civil Procedure 42.2.

The Davis firm moved to dismiss the amended petition on the same ground previously asserted by the receiver. The firm also resisted class certification, alleging plaintiffs had not sustained their burden of pleading or proving the elements necessary to establish a class under the rules. After hearing, the district court overruled the motion to dismiss and certified the class. The Davis firm sought interlocutory appeal from the order denying dismissal, which we granted, ¹ and appealed as a matter of right from the certification order. See Martin v. Amana Refrig., Inc., 435 N.W.2d 364, 367 (Iowa 1989). Further facts will be discussed as they pertain to the issues on appeal.

I. Standing.

The firm's motion to dismiss for lack of standing placed the burden on plaintiffs to show (1) a specific, personal, and legal interest in the litigation, and (2) injury. Hawkeye Bankcorp. v. Iowa College Aid Comm'n, 360 N.W.2d 798, 801 (Iowa 1985). Our appellate review is limited to correction of error in the court's application of legal principles. Dennis v. Christianson, 482 N.W.2d 448, 450 (Iowa 1992). The thrust of the firm's legal challenge to the court's ruling is that plaintiffs' standing is contrary to (1) exclusive powers conferred on the receiver under the court's appointment, and (2) general common law trust principles.

Turning first to the court order, we observe that the powers it grants are, indeed, extensive. As already noted, the court gave the receiver all powers granted the trustees under the indenture of trust. Under the indenture, the trustees were granted "full, exclusive and absolute power, control and authority over the trust property and over the affairs of the trust." They held complete power "to collect, sue for, receive and receipt for all sums of money or other property due to the trust." Further, the trustees enjoyed "full and complete power to take all actions, do all matters and things, and execute all instruments as they deem necessary, proper or desirable, in order to carry out, promote or advance the interests and purposes of the trust...."

Nevertheless, trustees may exercise only the power specifically conferred by the trust's terms or necessary to carry out its purposes. Van Gorden v. Lunt, 234 Iowa 832, 836, 13 N.W.2d 341, 344 (1944). Here the trust indenture grants the trustees no authority to seek tort or contract remedies against third parties for losses exceeding the trust res. Viewing the plaintiffs' petition in the most favorable light, we note that it seeks not only to recover trust property but to recover consequential damages stemming from lack of access to the funds. Nothing in the trust indenture purports to limit the participants' right to bring such independent tort claims on their own behalf. Indeed, a provision that holds the trust advisor and consultants liable to trust participants for gross negligence and reckless disregard of duties suggests just the contrary. Any doubts or ambiguities regarding the rights conferred upon the participants by this provision must be resolved in plaintiffs' favor. See Schreiner v. Scoville, 410 N.W.2d 679, 680 (Iowa 1987) (standard of review on motion to dismiss); National City Bank v. Coopers & Lybrand, 409 N.W.2d 862, 868 (Minn.App.1987) (strictly construing indenture powers against trustee to permit noteholders' ancillary claims).

Nor does the receiver's statutory authority preclude plaintiffs' suit as a matter of law. Under Iowa Code chapter 680 (1991), and subject to the control of the court,

a receiver has power to bring and defend actions, to take and keep possession of property, to collect debts, to receive the rents and profits of real property, and, generally, to do such acts in respect to the property committed to the receiver as may be authorized by law or ordered by the court.

Iowa Code § 680.4 (emphasis added). This statutory scheme authorizes the receiver to bring actions with respect to trust property pending judicial determination of proper distribution. Iowa State Commerce Comm'n v. Manilla Grain Terminal, Inc., 362 N.W.2d 562, 564 (Iowa 1985); II Ralph E. Clark Clark on Receivers § 578, at 943 (3d ed. 1959). The statute does not empower the receiver to collect money not owed to the trust itself, nor does the statute preclude trust beneficiaries from pursuing such recovery. The firm's bare assertion that the receiver's statutory powers are "broad and exclusive" cannot extend those powers beyond the authority granted by the court. Rudolph v. Davis, 237 Iowa 1383, 1387, 25 N.W.2d 332, 334 (1946).

Moreover, the firm's claim that plaintiffs can prove no damages in excess of those potentially recoverable by the receiver is clearly a question not properly resolved on a motion to dismiss. While plaintiffs' petition does not state the...